Sizing Up Criticism of New Medicare Drug Benefit

The new Medicare drug benefit for seniors has been criticized as too big, too small and too complicated. What’s seldom reported is that it is a novel system designed to stimulate private sector competition in delivering the drug benefit.

Critics like to say that the Medicare “Part D” program, which will provide prescription drug coverage for seniors starting Jan. 1, is an expansion of an already bloated Medicare system. The reality is that Part D marks an important departure from traditional Medicare. It takes a different, free-market approach toward providing benefits — an approach that so far appears to result in lower prices and more choices for seniors.

This start contrast between the original Medicare “Part B” (which covers doctor’s visits) and the new Part D (which covers drugs) was thrown in sharp relief recently by two back-to-back statements by the Centers for Medicare and Medicaid Services.

The first announcement was that the premium for Medicare Part B will rocket up 13 percent next year. The second was that the drug program will be cheaper — and allow greater choice — than anyone expected.

It turns out that in the new Part D drug program, premiums will average just $32 a month. And every state but Alaska will offer at least one plan that costs only $20 a month. That’s a lot lower than the $35 predicted by Congress.

Not only are Part D premiums cheaper than expected. But seniors will save even more money when they actually use the benefit to buy their drugs.

Take, for example, someone who has modest drug expenses and is spending $2,400 per year on prescription medicine. Under the new drug benefit, he would pay approximately $885 in premiums, deductibles, and co-payments. His drug plan would pick up the remaining $1,515.

Meanwhile, a person with high drug costs of $12,000 per year would pay only about $4,000, or one-third the total price. In other words, he would save a dramatic $8,000.

But seniors can cut their costs even further. Those who decide to participate in an integrated health-care plan through the Medicare Advantage program — about 5 million seniors right now, or 12 percent of Medicare users — may have an option of getting prescription-drug coverage for no additional premium.

By introducing free-market incentives, Part D marks a radical departure in the way Medicare is run.

With the traditional Medicare Part B program, there is no competition or choice. Seniors receive services and doctors are paid on a “fee-for-service” basis. But utilization — and costs — are rising, and seniors have no alternative but to fork over more money. The drug program is different.

Private companies will compete to offer the best plans to seniors, who can then pick and choose what’s best for them.

The result isn’t just lower prices. The increased competition has also created more choice.

Already, 10 private companies will offer the new drug benefit nationwide, and many more insurers will sell coverage in specific states and regions.

Each company can offer customers several options, with different combinations of benefits and co-payments.

The drug plans must keep prices below a cap and provide certain mandated benefits. Importantly, though, they have full authority to negotiate drug prices with pharmaceutical companies — potentially winning discounts for buying in bulk. Companies also have substantial freedom in structuring benefits. A drug plan could, for instance, offer a lower co-payment for a customer’s favorite brand.

As a result, the drug plans are competing vigorously to offer the best deal to potential customers. Seniors are free to shop around for the best price and a set of benefits that suits their needs.

While elderly citizens contemplate $20-a-month drug coverage under Part D, they will soon be forced to pay $88.50 for their Medicare Part B benefit, which just keeps rising. Medicare health-insurance premiums will have gone up 51 percent since 2003.

This steady increase, which seniors have no choice but to swallow, is typical of government-run systems that shun the free market.

Medicare Part D points us in a new direction. And it offers a simple lesson for all government programs: Competition brings about more choices and lower prices, while a lack of competition does just the opposite.

We should seek to expand the market freedoms — embodied by the new drug benefit program — throughout the Medicare system and beyond.

***************

Grace-Marie Turner is president of the Galen Institute, a nonprofit organization devoted to health policy research and education.

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The new Medicare drug benefit for seniors has been criticized as too big, too small and too complicated. What’s seldom reported is that it is a novel system designed to stimulate private sector competition in delivering the drug benefit.

Critics like to say that the Medicare “Part D” program, which will provide prescription drug coverage for seniors starting Jan. 1, is an expansion of an already bloated Medicare system. The reality is that Part D marks an important departure from traditional Medicare. It takes a different, free-market approach toward providing benefits — an approach that so far appears to result in lower prices and more choices for seniors.

This start contrast between the original Medicare “Part B” (which covers doctor’s visits) and the new Part D (which covers drugs) was thrown in sharp relief recently by two back-to-back statements by the Centers for Medicare and Medicaid Services.

The first announcement was that the premium for Medicare Part B will rocket up 13 percent next year. The second was that the drug program will be cheaper — and allow greater choice — than anyone expected.

It turns out that in the new Part D drug program, premiums will average just $32 a month. And every state but Alaska will offer at least one plan that costs only $20 a month. That’s a lot lower than the $35 predicted by Congress.

Not only are Part D premiums cheaper than expected. But seniors will save even more money when they actually use the benefit to buy their drugs.

Take, for example, someone who has modest drug expenses and is spending $2,400 per year on prescription medicine. Under the new drug benefit, he would pay approximately $885 in premiums, deductibles, and co-payments. His drug plan would pick up the remaining $1,515.

Meanwhile, a person with high drug costs of $12,000 per year would pay only about $4,000, or one-third the total price. In other words, he would save a dramatic $8,000.

But seniors can cut their costs even further. Those who decide to participate in an integrated health-care plan through the Medicare Advantage program — about 5 million seniors right now, or 12 percent of Medicare users — may have an option of getting prescription-drug coverage for no additional premium.

By introducing free-market incentives, Part D marks a radical departure in the way Medicare is run.

With the traditional Medicare Part B program, there is no competition or choice. Seniors receive services and doctors are paid on a “fee-for-service” basis. But utilization — and costs — are rising, and seniors have no alternative but to fork over more money. The drug program is different.

Private companies will compete to offer the best plans to seniors, who can then pick and choose what’s best for them.

The result isn’t just lower prices. The increased competition has also created more choice.

Already, 10 private companies will offer the new drug benefit nationwide, and many more insurers will sell coverage in specific states and regions.

Each company can offer customers several options, with different combinations of benefits and co-payments.

The drug plans must keep prices below a cap and provide certain mandated benefits. Importantly, though, they have full authority to negotiate drug prices with pharmaceutical companies — potentially winning discounts for buying in bulk. Companies also have substantial freedom in structuring benefits. A drug plan could, for instance, offer a lower co-payment for a customer’s favorite brand.

As a result, the drug plans are competing vigorously to offer the best deal to potential customers. Seniors are free to shop around for the best price and a set of benefits that suits their needs.

While elderly citizens contemplate $20-a-month drug coverage under Part D, they will soon be forced to pay $88.50 for their Medicare Part B benefit, which just keeps rising. Medicare health-insurance premiums will have gone up 51 percent since 2003.

This steady increase, which seniors have no choice but to swallow, is typical of government-run systems that shun the free market.

Medicare Part D points us in a new direction. And it offers a simple lesson for all government programs: Competition brings about more choices and lower prices, while a lack of competition does just the opposite.

We should seek to expand the market freedoms — embodied by the new drug benefit program — throughout the Medicare system and beyond.

***************

Grace-Marie Turner is president of the Galen Institute, a nonprofit organization devoted to health policy research and education.